Tuesday, October 23, 2012

AT&T Mobility - Thoughts Ahead of the Earnings Release

AT&T is set to release its earnings and performance metrics, October 24th at 9:00 AM  Its earnings has followed Verizon in the past and observers cannot help but compare the two.  Each carriers' wireless divisions are reaping the lions share of revenue growth while the landline business units continue to struggle.

Net Additions:  AT&T does a good job with net additions.  In previous quarters, these numbers had been boosted through the wholesale group.  Its postpaid organic growth is fine but has not had the tidal wave acquisition momentum as Verizon Wireless.  Q3 should be no different as the postpaid and prepaid net adds should fall in line with previous Q3s.  Q3 has usually trended up for the carrier. Wholesale should continue to bring in the lion's share of the net additions.

Previous Q3 postpaid net additions have been 745K in 2010 and 319K in 2011. With Q2 2012 coming in at 320K, the logic should be to trend up, also given the iPhone 5 factor. The iPhone has helped the carrier attain switchers in the past, what the percentage is for Q3 should be telling. At the height, the iPhone brought in mid-40% figures for activations that were new to AT&T. 

The prepaid trend is on a worrisome declining trend. Though additions are admirably positive, the trend is reverse to that of Verizon Wireless' prepaid.  Each carrier has a substantial postpaid base to protect to avoid rate plan cannibalization. Each is bleeding somewhat from the unlimited propositions from MetroPCS, Sprint prepaid brands (Virgin Mobile and Boost), Tracfone's Straight Talk and finally Leap's Cricket. A downward trend is obviously a bad thing but any upward trend suggests that AT&T has looked more aggressively at this segment and wants to play more aggressively.

Churn:  The trend is in a good direction, both overall and postpaid.  Though Verizon Wireless has been the industry leader for many years, AT&T is doing an admirable job in churn.  The magic mark of note in postpaid is when that value dipped below 1% last quarter. 
Continued downtrends are obviously desired.  As grabbing switchers has always been a big battleground issue, any reports of a upward voluntary churn indicator would raise eyebrows. However with the iPhone as a key anchor and its own reports of record iPhone 5 sales, expectations for postpaid churn should go down and buck previous Q2 trends of a rise/remain flat.

ARPU (Rather - Postpaid ARPU):    AT&T has been the leader in postpaid ARPU. In Q2, it neared $65. As a gauge, Sprint is closest with <$61 and Verizon Wireless changed the game in Q3 with shifting the conversation to Average Revenue Per Account (ARPA).  However, Verizon Wireless' Q2 postpaid ARPU came in a little over $56. 

For Q3, AT&T should break $66 and allow the carrier to continue to reign in postpaid ARPU. Also it may be that AT&T will continue to report ARPU as a metric since it wants to continue to tout that leadership role. Since Verizon Wireless is reporting ARPA, the carrier may bring also  offer their own ARPA calculation either this quarter or the next depending on how much pressure the investment community brings to bear.  A likely scenario may be that AT&T will report both ARPU and ARPA but eventually support ARPA-only down the line.  Since ARPU has been pretty standard in calculation and ARPA seemingly is straight forward, every carrier has to buy-in to make it work for the industry.

EBITDA Margin(The indicator for profitability): Since this figure is a company's indicator for success, it is an important competitive performance metric.  AT&T continues to chase its rival Verizon Wireless but the gap is decent as Verizon Wireless' whopping Q3 50% figure is rather impressive.  For Q2, AT&T came in at 45%, jumping almost 3% from the previous quarter. No doubt that EBITDA should increase but likely less than 50%.